Sky-High Demand in New York

What’s the biggest difference between Manhattan’s current real estate boom and those of the past? This time around, there has not been a flood of new office construction to capitalize on demand that, in this cycle, has driven rents in the swankiest towers up to and beyond $100 per sq. ft.

Midtown Manhattan office vacancy now stands at 5.8%, roughly half the national average, and that’s down from 6% a year ago. And, according to an Apr. 4 report from Cushman & Wakefield, tenants in the nation’s densest office market are not likely to see any relief in coming years as growing demand for space outstrips modest plans for construction.

Cushman & Wakefield projects that tenant demand should absorb 28 million sq. ft. of additional space in Manhattan over the next decade. There’s just one problem: Manhattan’s office inventory is only expected to increase by 18.1 million sq. ft. during that period.

“New York City is producing far less new office space than it has in previous cycles,” says Joseph Harbert, chief operating officer at Cushman & Wakefield. “And that’s why we believe that all of the proposed new downtown office space should get built.”

While the numbers back up such an opinion, the construction of some 12 million sq. ft. of new office space also bodes well for Cushman & Wakefield’s property management business. The Manhattan-based real estate services firm currently manages several million sq. ft. of downtown office space.

Without an increase in supply, average asking rents have only one way to go — up. Asking rents were already climbing before the end of March, rising from $40.28 to $43.20 on a per sq. ft. basis between the end of March 2005 and 2006.

Another sign that Manhattan office space already commands premium rents: there were 15 different office leases signed at $100 per sq. ft. or higher during the first quarter. Last year, by comparison, saw just 10 such deals signed.

The lion’s share of projected supply is slated for lower Manhattan. As of this week, in fact, roughly 12 million sq. ft. of new office space in three new towers is slated for lower Manhattan through 2016.

Data from Moody’s Economy.com projects that office-using employment growth in Manhattan will post 1% to 1.4% annual gains through 2016. That translates into roughly 2.5 million sq. ft. of space per year, placing total demand by 2016 just shy of Cushman’s projection. Between 1995 and 2005, by comparison, Moody’s says Manhattan averaged 2.1 million sq. ft. of leasing absorption per year.

The prospect of limited supply and rising demand bodes well for landlords with existing properties. Even now, there is little sign of speculative building to undercut the incumbents: Of the 8 million sq. ft. of new office space recently completed in midtown and midtown south, more than 75% of that space was pre-leased.